In spite of continued low interest rates, mortgage applications remain slow in many areas of the US housing market. So, after the series of scandals, settlements and new regulations that marked the aftermath of the housing collapse of 2008, leading mortgage servicers are offering a virtual menu of financing, refinancing and homeowner support options in an effort to lure more potential buyers. One such offering, the no-closing-cost mortgage, can save money – but only under limited circumstances.
Closing costs – services associated with arranging a loan and securing a property – can run into thousands of dollars. Those fees typically cover the loan origination itself, property appraisals, insurance and related expenditures – a daunting expenditure for some hopeful buyers who have just barely managed to pull together a down payment. The no-closing-cost mortgage option eliminates those upfront fees. But the price you pay, in most cases, comes in the form of a higher interest rate over the term of the loan.
In some situations, a lender may simply waive the fees altogether. But in general, those costs are absorbed by a higher rate on the loan. For example, prospective buyers may be offered a traditional loan with closing costs attached at a rate of 3.75% — but the rate jumps to 4.25% without closing costs. Even with a higher rate, this option may be the way to make a purchase possible for those who don’t have the money for those costs upfront.
But real estate professionals caution that although skipping those closing costs sounds attractive, this loan may make sense only if a purchaser plans to sell the property within five years or so. That’s about the time it takes to recoup the waived closing costs at the higher rates charged for this kind of loan – and that makes it somewhat less expensive than paying the closing costs upfront.
For those planning to hold onto the property for a much longer time – and this includes investors following Jason Hartman’s recommendations on income property investing – a no-closing cost mortgage may not make sense, since after the closing costs are recouped, the borrower is still stuck with a higher interest rate than a traditional mortgage would offer.
The picture is generally the same for refinancing an existing mortgage. It’s wise to consider the long view as well as the immediate issue of avoiding an upfront payout, especially if you’re planning on selling the property in the not too distant future.
Mortgage lending options may vary from lender to lender, and not all offer the no-closing-cost variety, particularly if they’re simply servicing a loan that originates with another lender such as Fannie Mae. Financial specialists recommend asking about other loan options if they aren’t offered, and weighing immediate benefits against future returns. For investors looking toward long-term gains, no closing cost mortgage options may offer only short-term relief.
The Jason Hartman Team
